India: Focus on near-term risks – Standard Chartered

Anubhuti Saha, Head of South Asia Economic Research at Standard Chartered, points out that for Indian economy oil prices are flagged as the biggest concern amid focus on global, domestic risks to the economy, while widening C/A deficit, risk of fiscal slippage, management of market borrowings in H2 will be closely watched.

Key Quotes

“Widening C/A deficit is a worry: A sharp widening of the current-account (C/A) deficit is the main concern among investors (both domestic and foreign), policy makers and analysts. While the C/A deficit looks manageable as a percentage of GDP (we expect the FY19 C/A deficit at 2.8% of GDP), the absolute amount of funding requirement has increased significantly to c.USD 75bn from c.USD 48bn in FY18.

Lack of clarity on oil prices, especially ahead of impending sanctions on Iran, has added to concerns on the C/A deficit as India’s sensitivity to oil prices remains high. We estimate that every USD 10/bbl increase in crude oil prices widens the C/A deficit by USD 14bn (0.5% of GDP) and pushes inflation higher by 20-40bps.”

“But INR weakness is not causing panic: While policy makers are closely watching the impact of a wider C/A deficit on the external sector and the Indian rupee (INR), there was wide consensus (including investors) that the weaker currency is more a reflection of a stronger USD. Hence, aggressive intervention by the Reserve Bank of India (RBI) is not expected. In fact, some see this as an opportunity to boost exports, which have not performed well amid demonetisation, goods and services tax (GST) implementation, and other challenges.”

“Some discussions also focused on the possibility of sovereign bond issuance. Views on the issue were divided. While some believed that this is one of many instruments that can be tapped when needed, others discussed the possibility of issuing such bonds in local currency outside India to reduce risks emanating from exchange-rate fluctuation. We do not see urgency in issuing these bonds currently, despite pressure on the balance of payments (BoP).”